Engaging in international business transactions - Do you have a cross-border mindset?

With the flourishing international trade between Australian parties and those in the Asia-Pacific region, particularly China,[i] keeping abreast of the issues that may arise in international transactions could potentially save a number of headaches down the track.

This article explores a basic snapshot of select issues relevant to international trade involving products. These are by no means exhaustive, but they are intended to provide a sample of typical cross-border issues for your consideration.

1. Governing law and jurisdiction clauses

Are you adopting a “cross-border mindset” when drafting your contracts? Are the governing law and the jurisdiction clauses included in a manner that suits your requirements? Do you understand the implications if Australian law does not apply?

Courts in general discourage inappropriate “forum shopping” by parties,[ii] and it is ideal for the contract to include clear governing law and jurisdiction clauses to afford the parties some certainty, in an attempt to avoid unnecessary disputes about these matters. As the governing law clause typically indicates that the parties intended that the particular law is to apply to the relevant contract, the terms of the governing law clause should be sufficiently clear to assist the parties and any courts that may be required to interpret the terms of the contract. The jurisdiction clause stipulates that the parties agreed to submit to the courts of a particular jurisdiction, but there is an important distinction between non-exclusive and exclusive jurisdiction clauses.[iii] If the choice of the parties cannot be upheld or determined, it may depend upon the application of complex conflict of law rules.

There is a wealth of information available regarding the choice of law and jurisdiction clauses for any given contract in international transactions. Including well-drafted clauses in your contracts is a fundamental method of mitigating the risk of uncertainty and/or incurring unnecessary costs arguing about these matters. It is recommended that you obtain legal advice in relation to specific contracts and transactions, as advice may differ depending on your circumstances and the nature of the governing law or jurisdiction clauses sought.

2. The arbitration clause

Does your contract include a boilerplate international arbitration clause? If arbitration is appropriate in the circumstances, a properly drafted and enforceable arbitration clause that is tailored to the circumstances can provide the parties with comfort regarding the process to be adopted to resolve their disputes.

The choice of the arbitral seat in your arbitration clause is crucial as it typically determines the law to be applied in relation to the arbitration process. The meaning of the “seat” (the legal location for the process) is therefore different to the “venue” (the physical location) of the arbitration itself notwithstanding that they may ultimately be in the same place.

Australia is a contracting state to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards adopted in 1958 by the United Nations Conference on International Commercial Arbitration (New York Convention). Australia enacted into its domestic law the provisions of the New York Convention in the International Arbitration Act 1974 (Cth) (IAA).

The IAA is intended to encourage parties involved in international trade and commerce to arbitrate their disputes, to facilitate the use of arbitration agreements and the recognition and enforcement of arbitral awards; and to give effect to international instruments including the New York Convention, the 1985 UNCITRAL Model Law on International Commercial Arbitration, and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, signed by Australia on 24 March 1975.[iv] One example of the benefits which can be derived from the IAA is found in s 7(2) of theIAA, which provides that a court has the power to order a stay of proceedings and refer the parties to arbitration if there are proceedings in another court where the issues for determination between the parties to the agreement may be settled by arbitration. There are also limited circumstances where a court may not enforce an award. Overall, Australia appears to adopt a positive approach to arbitration and the enforcement of arbitral awards, which is facilitated by the IAA.[v]

Again, you should always obtain legal advice in relation to specific contracts and to whether or not an arbitration clause is appropriate in the circumstances and the form it should take.

3. Know your Incoterms

Have international commercial terms, known as Incoterms, become second nature for you? Those who regularly engage in international commercial transactions will be well-versed in INCOTERMS 2010, which is the most recent version of these rules of interpretation to interpret commonly used trade terms produced by the International Chamber of Commerce (ICC). Nevertheless, many Incoterms continue to be misunderstood and misapplied in practice. Accordingly, it is important to be cognisant of their impact. For example, do you know the difference between agreeing to an EXW – Ex Works term or DAT – Delivered at Terminal? The passage of risk, the cost to the parties and the parties’ respective responsibilities are different depending on the term used in the contract, so this is an important consideration when buyers and sellers include an Incoterm in their contract. The diagram below illustrates how each of the 11 INCOTERMS 2010 operates for the buyer and the seller at particular stages of the transport journey:

4. Consider the potential cross-border application of the Australian Consumer Law

If you are a consumer,[vi] the Australian Consumer Law in Schedule 2 of the Competition and Consumer Act 2010 (Cth) (ACL) may offer some protection, even in cross-border situations. This is also an important consideration for overseas parties selling products or services to Australian consumers, as the US-based company Valve Corporation (Valve) has recently discovered. In April 2018, the High Court of Australia dismissed an application by Valve for special leave to appeal a decision of the Full Federal Court of Australia which held that the ACL applied in respect of Australian consumers/subscribers of an online game produced by Valve. The Full Federal Court found Valve contravened certain provisions of the ACL in connection with the supply of goods to Australian customers and was liable to pay $3 million in penalties.[vii] The effect of the High Court’s dismissal of special leave is that the ACLapplies to Valve in its transactions with Australian consumers and the Full Federal Court’s decision stands. It is also clear that the Australian Competition and Consumer Commission has an interest in pursuing companies in breach of the legislation, including those based overseas which sell to Australian consumers.[viii]

Food for thought

These topics were canvassed in a cross-border hypothetical session at the Asia-Pacific Legal Frontiers Primerus Conference held in March 2018 in Sydney. The conference was attended by representatives of the Australian Institute of Credit Management.

International trade between Australia and Asia will be a focus in the coming years. The question remains: how will you apply a cross-border mindset in transactions with an international character to best suit your needs or the needs of your client?

[iii] In Ace Insurance Ltd v Moose Enterprise Pty Ltd [2009] NSW 724, Brereton J stated at [15]: “Not every submission to jurisdiction involves a promise not to sue in a foreign jurisdiction; it will do so only if it is an “exclusive jurisdiction” clause. Whether a jurisdiction clause is an exclusive jurisdiction clause is a question of construction of the particular contract, and the absence of the word “exclusive” is not determinative.”

[v] As noted by The Hon. Chief Justice Allsop of the Federal Court of Australia and the Hon. Justice Croft of the Supreme Court of Victoria in ‘Judicial Support of Arbitration’, paper presented at the APRAG Tenth Anniversary Conference on 28 March 2014; see also International Arbitration Act 1974 (Cth), s 8(1).